18 October 2018 2QFY19 Results Update | Sector: Oil & Gas Reliance Industries BSE SENSEX S&P CNX CMP: INR1,149 TP: INR1,479 (+29%) Buy 34,780 10,453 Bloomberg RIL IN Consol. EBITDA in line led by healthy retail performance Equity Shares (m) 5,922 M.Cap.(INRb)/(USDb) 7282.3 / 98.9 52-Week Range (INR) 1329 / 862 Reliance Industries’ (RIL) 2QFY19 standalone EBITDA increased 15% YoY (-2% QoQ) to 1, 6, 12 Rel. Per (%) 0/21/25 INR149b, below our estimate of INR163b, due to lower-than-expected refining 12M Avg Val (INR M) 8018 throughput and GRM. GRM stood at USD9.5/bbl (our estimate: USD10.2/bbl) and Free float (%) 53.8 throughput at 17.7mmt (our estimate: 18.0mmt). Standalone PAT grew 7% YoY (flat Financials & Valuations (consol.) (INR b) QoQ) to INR88.6b (our estimate: INR93.3b). Consolidated EBITDA of INR211b (+36% Y/E March 2018 2019E 2020E YoY, +2% QoQ) was in line with our estimate, driven primarily by a better-than- Net Sales 3,917 5,927 6,559 expected retail operational performance. Consolidated PBT (+16% YoY, -4% QoQ) was EBITDA 642 825 961 8% lower than our estimate due to higher interest cost and lower other income. Net Profit 361 395 511 Consolidated PAT stood at INR95.5b (our estimate: INR100.5; +18% YoY, +1% QoQ). EPS (INR) 60.9 66.7 86.3 EPS Gr. (%) 20.7 9.4 29.4 BV/Sh. (INR) 496 554 630 Lower GRM: GRM stood at USD9.5/bbl (our estimate: USD10.2/bbl; -21% RoE (%) 13.0 12.7 14.6 YoY, -10% QoQ) and throughput at 17.7mmt (our estimate: 18.0mmt; -2% RoCE (%) 9.1 9.9 11.2 YoY, +7% QoQ). Premium over Singapore complex stood at USD3.4/bbl. GRM Payout (%) 11.9 11.9 11.9 was adversely impacted by the shutdown of FCCU, weaker petrol/ATF cracks Valuations P/E (x) 18.9 17.2 13.3 and narrower light-heavy differentials. P/BV (x) 2.3 2.1 1.8 Robust volume growth, healthy deltas drive profitability: Petchem EBIT EV/EBITDA (x) 13.4 9.3 7.4 grew 62% YoY (+3% QoQ) to INR79.7b, led by favorable margins and strong EV/Sales (x) 2.2 1.3 1.1 volume growth. EBIT margin of 18.5% was lower than 19.9% in 1QFY19 but marginally higher than 18.3% in 2QFY18, primarily due to strong polyester Estimate change chain deltas, stable polymer deltas and feedstock cost optimization. TP change Production volumes were higher on account of ramp-up of ROGC. Rating change Domestic E&P continues the downtrend: RIL reported E&P EBIT loss of INR1.9b v/s a loss of INR960m in 2QFY18 and INR2.5b in 1QFY19. KG-D6 gas production declined to 3.7mmscmd (-33% YoY, -10% QoQ). Shale gas production was down to 21.2bcfe (-37% YoY, -11% QoQ) on account of natural decline. CBM production stood at 0.94mmscmd. RJio – aggressive subscriber growth continues: RJio’s revenue grew 14% QoQ to INR92.4b (in-line), driven by strong subs adds (net adds up 29% QoQ to 37m), partly offset by a 2% drop in ARPU to INR131.7. Consequently, EBITDA grew strongly by 14% QoQ to INR35.7b (in-line), despite a 22% QoQ rise in network cost opex, which drove overall opex up by 14%. EBITDA margin shrank marginally by 20bp QoQ to 38.7%. PAT increased 11% QoQ to INR6.8b (5% beat), driven by lower-than-expected depreciation cost. The pace of subscriber addition at RJio has been consistently increasing over the last six quarters. It added 42m gross subscribers (37m net subscribers), of which smartphone subscriber adds were about 7.5-8m on a monthly basis (~23-24m quarterly) and Jiophone subscriber adds were about 6m monthly. Swarnendu Bhushan – Research Analyst ([email protected]); +91 22 6129 1529 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional -Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Reliance Industries Valuation and view: We expect Singapore GRM to average USD6/bbl, going forward. High oil prices, combined with narrowing light-heavy differential and weak demand, are likely to result in poor refining margins in the near term, though. With its higher complexity and flexibility, RIL is expected to generate higher GRM of USD11-12/bbl over FY19-20. Petcoke gasifiers are expected to ramp up by FY19-end. Petrochemical deltas have shown pressure sequentially. Two 1.5mmtpa US ethane crackers have already started, while another two are expected to start soon. Expect moderation in petrochem margins, going forward. RJio: Equity value unchanged at INR255/share Our FY19 EBITDA estimate remains intact. However, we have marginally increased our FY20 EBITDA estimate by 4% to INR224b. This is on the back of aggressive subscriber growth, partly offset by ARPU decline. Our DCF-based TP remains unchanged at INR255, despite the upward revision in earnings, as we have simultaneously also raised our FY19 capex estimate to INR600b (prior: INR400b). Implied EV/EBITDA works out to be 15x/11x on FY20/21E. Management clearly highlighted that it would focus on subscriber growth, particularly in categories like feature phones (530m industry subscribers) and postpaid, where it has limited penetration currently but growth opportunities are immense. We have subsequently factored 12.5m/5m monthly subscriber adds in 2HFY19/FY20 (reaching 387m at end-FY20). With a higher share of low- ARPU Jiophone subscribers, we have factored in a 2% ARPU decline in 2Q/3QFY19 and 3% in FY20. On FY20 basis, the stock trades at 13.3x consolidated EPS of INR86 and EV/EBITDA of 7.4x. In 1HFY19, the company has clocked consolidated PAT of INR190.3b v/s our FY19 estimate of INR395b. Our SOTP-based fair value stands at INR1,479/share. Maintain Buy. 18 October 2018 2 Reliance Industries 18 October 2018 3 Reliance Industries Exhibit 1: RIL segment-wise performance snapshot (standalone) FY16 FY17 FY18 FY19 2QFY19 (%) In INRb 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q YoY QoQ Segmental Revenues Petchem 196 199 180 195 194 213 217 252 241 268 325 368 390 430 60.4 10.4 Refining 614 513 496 403 489 518 532 639 589 593 638 743 814 815 37.3 0.1 Oil & Gas 12 12 10 9 8 7 6 7 6 8 8 6 8 7 -3.2 -2.4 Others 2 3 3 4 2 3 3 3 3 3 3 4 3 5 59.2 61.2 Total 823 726 688 611 694 741 758 901 839 872 974 1,121 1,214 1,257 44.1 3.6 Segmental EBITDA Petchem 33 35 36 38 38 44 44 45 51 59 69 77 92 95 60.3 2.9 Refining 59 62 71 72 74 67 70 74 71 73 69 64 61 61 -16.3 -0.6 Oil & Gas 8 8 8 3 3 3 1 2 1 2 3 3 5 -2 -191 -138 Total 101 104 116 114 115 114 114 121 123 134 140 145 158 154 14.8 -2.8 EBITDA Margin (%) Petchem 17 17.5 19.9 19.7 19.6 20.8 20.1 17.8 21 22 21.1 21 23.6 22 Refining 9.6 12 14.4 17.9 15.1 13 13.1 11.5 12.1 12.3 10.8 8.6 7.5 7.5 Oil & Gas 69.9 66.6 83.4 34.6 44.4 37.7 16.4 32.6 17.9 26.8 37.1 54.4 64.7 -25.3 Total 12.2 14.4 16.8 18.6 16.6 15.4 15.1 13.4 14.6 15.4 14.4 12.9 13 12.2 Segmental EBIT Petchem 24 25 26 27 29 35 34 35 40 49 57 63 77 80 62.3 3 Refining 51 54 63 64 66 59 61 63 64 65 61 56 52 52 -21.1 -1.2 Oil & Gas 2 1 2 -2 0 0 -1 -1 -2 -1 -1 -4 -2.5 -1.9 93.8 -24.1 Others 1 1 1 1 1 1 1 1 1 1 1 1 0 0 -95.1 -84.2 Total 79 81 92 89 96 95 95 98 103 115 118 116 128 130 12.9 1.5 EBIT Margin (%) Petchem 12.5 12.6 14.3 13.9 14.9 16.3 15.5 13.7 16.5 18.3 17.4 17.2 19.9 18.5 Refining 8.3 10.5 12.7 15.8 13.4 11.4 11.5 9.8 10.8 11 9.5 7.5 6.4 6.3 Oil & Gas 19.5 11.7 24.6 -26.9 6.1 3.4 -20.1 -11.5 -39.7 -12.6 -12.1 -68 -32.5 -25.3 Total 9.6 11.2 13.4 14.6 13.9 12.8 12.5 10.8 12.2 13.2 12.1 10.4 10.5 10.3 Operating Metrics Refining (USD/bbl) RIL GRM 10.4 10.6 11.5 10.8 11.5 10.1 10.8 11.5 11.9 12 11.6 11 10.5 9.5 -20.8 -9.5 Singapore GRM 8 6.3 8 7.8 5 5.1 6.7 6.4 6.4 8.3 7.3 7 6 6.1 -26.8 1.7 Premium 2.4 4.3 3.5 3 6.5 5 4.1 5.1 5.5 3.7 4.3 4 4.5 3.4 -7.4 -24.4 Refinery Thr' put 16.6 17.1 18 17.8 16.8 18 17.8 17.5 17.5 18.1 17.7 16.7 16.6 17.7 -2.2 6.6 (mmt) Utilization (%) 107 110 116 115 108 116 115 113 113 117 114 108 107 114 Petrochemicals Polymer (TMT) 1,083 1,217 1,183 1,141 1,146 1,186 1,054 1,069 978 1,186 1,273 1,466 1,421 1,408 18.7 -0.9 Polyester (TMT) 512 543 548 591 513 594 597 580 664 600 624 702 715 740 23.3 3.5 Polyester Int.